The Pensions Regulator: a deficit of credibility

“A tentative and apologetic approach that does not cut the mustard.” Frank Field’s description of the performance of the Pensions Regulator (TPR) at Carillion is merited. This line alone from the regulator’s response to MPs’ inquiries tells you why: “TPR has launched an investigation to determine if there is information that suggests we should use our anti-avoidance powers.”

It is laughably late in the day to contemplate an anti-avoidance inquiry. Even if a successful case could be mounted, it’s hard to see how significant sums be recovered. The asset-light construction giant is bust and is being liquidated. And, even if directors’ bonuses could be retrieved, the numbers will still be tiny given the pension schemes’ deficit is likely to be almost £1bn.

Instead, the regulator must explain why it didn’t close the stable door before the horse bolted. The explosive allegation from Robin Ellison, chairman of the Carillion pension schemes, is that his trustees sought higher contributions from the company after valuations in 2008, 2011, and 2013. When the company resisted, the regulator got involved, but Ellison’s letter goes on: “Ultimately, for all three valuations, TPR decided not to exercise its powers.”

That revelation does not clear Ellison entirely: he will still have to explain to MPs why he didn’t resign in protest. But the regulator’s inaction is more glaring – and its early explanation is not persuasive.

The key passage from TPR is this: “The content of Carillion’s recovery plans, and its payment of dividends, did not highlight sufficient concern to justify the use of our powers based on the group’s trading strength as presented at the time in their audited accounts.”

Blame the auditors, then? Well, yes, the role of KPMG in the Carillion calamity is plainly critical and the Financial Reporting Council’s investigation will be the most important it has undertaken in years (especially for KPMG since the book is still open on its role at Co-op Bank and Rolls-Royce). But TPR cannot be a prisoner to signed-off accounts. If the Carillion trustees were unhappy for a decade, why didn’t the regulator take up cudgels on their behalf? Shouldn’t trustees’ voices count as much as KPMG’s?

Instead, TPR tolerated a situation in which Carillion paid more to its shareholders in dividends than it contributed to the pension schemes. Over the last two years, the score was £163m in dividends and £94m in deficit recovery payments.

A standard reply in these situations is that TPR is obliged to perform a balancing act. It has to protect the interests of pensioners while being mindful of a company’s need to grow and invest. But, come on, such trade-offs cannot be a blanket excuse for regulatory inaction. The charge against TPR is that it too readily swallows corporate pleas of poverty even as dividends are increased.

At Carillion, we’re told, trustees were frustrated for a decade but the company’s self-interested view of how to close the deficit, and at what pace, prevailed. Field’s usual conclusion is to demand more powers for TPR. But the first question to ask is whether the body is any good at using the powers it already possesses. If the answer is no, half the problem is regulatory timidity.

Melrose must show its maths

Calculating pensions deficits is tricky, of course. Automotive and aerospace group GKN, as it seeks to defend itself against the £7bn hostile bid from Melrose, produced a menu of sorts on Monday. Pick a deficit – £400m, £700m or £1.4bn, depending on your preferred basis of calculation.

GKN argues the numbers could move higher if Melrose’s offer succeeds, which seems a fair point. The bidder wants to carry substantially more debt, as a percentage of earnings, so the corporate covenant could weaken and thus contributions might have to increase.

For its part, Melrose points to its own “impeccable track record” in improving pensioners’ rights and says it has already offered to pay “up to” £150m into the GKN schemes if it wins.

This tit-for-tat is generating more heat than light. Would an extra £150m up-front satisfy the trustees? What level of regular contributions would be demanded under Melrose’s ownership? Would regulatory blessing be required? Shareholders deserve firm answers before they vote on the actual takeover proposal – and Melrose, as the bidder, must show its workings.

Honest Johan! EasyJet CEO’s shrinking pay

EasyJet is suitably embarrassed about its huge gender pay gap – a function, in large part, of the fact that 94% of its high-earning pilots are men – so one shouldn’t grumble that new chief executive Johan Lundgren is volunteering to cut his salary from £740,000 to the £706,000 earned by his predecessor, Dame Carolyn McCall, in her final year. These gestures matter.

But surely there’s another conclusion to be drawn: easyJet’s board, when offering the job to Lundgren, could have negotiated harder. That’s embarrassing too.